Quality Conundrum: Complications Boost Hospital Profits

Hospitals can make much more money when surgery goes wrong than in cases that go without a hitch.

And that presents a problem for patients. The financial incentives don't favor better care.

"The magnitude of the numbers was eye-popping," says Atul Gawande, a professor of surgery at Harvard Medical School, and an author of the study, which was just published in JAMA, the Journal of the American Medical Association. "It was much larger than we expected."

If a patient with private insurance had complications after surgery, hospitals made $39,017 more profit than if all had gone well. That's compared to an additional profit of $1,749 for a Medicare patient with complications after surgery.

"That's an indication of the level of perversity here," Gawande says. "Having a complication was profitable, and fighting complications was highly unprofitable."

It's not surprising that health care costs are higher when there are complications, since patients need more care to get better. And it's not surprising that hospitals bill private insurers at a much higher rate than Medicare.

There was no profit with Medicare patients. The paper used "contribution margin," which is revenues minus variable costs. In other words, the expense of items used directly for a patient's care, not overhead or other fixed costs.

The much higher margin on cases involving mistakes is enough to make a patient think that hospitals aren't highly motivated to reduce medical errors. In fact, one reason that Gawande and his colleagues embarked on the study is that many hospitals have been slow to adopt practices proven to improve the quality of care and save money.

"We have never seen hospitals that are actively trying to cause complications to make a profit," Gawande told Shots. "But we've seen a lot of hospitals where you say, "Why aren't you investing in reducing risk, the way other industries do?' "

The researchers looked at 34,000 surgeries at 12 hospitals in the Texas Health Resources system in 2010. About 5 percent of people experienced complications. That included surgical site infection, sepsis, pulmonary embolism, stroke, heart attack, pneumonia and other infections.

The study was part of a larger effort to improve quality in the system.

"It's just more evidence that payment reform is key to health care reform," says Mark Lester. He's executive vice president of Texas Health Resources, and a co-author of the paper. "We've unmasked some hidden perverse incentives that are just part of our system."

Shots asked if Texas Health is talking with insurers about removing those perverse incentives. "I can't comment specifically on discussions we have had or are having with the payors," Lester said. "We're all moving toward payment reform. It's happening incrementally, because it's very complex."

Many efforts are underway to reduce financial incentives for providing more care, including bundled payments for Medicare that pay the same amount for a procedure, with or without complications.

Wonder how your hospital is doing? "Ninety percent of the country is still functioning in the world we describe in the paper," Gawande says.